UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarter ended: December 30, 2006      Commission File Number: 1-10730

HAEMONETICS CORPORATION

(Exact name of registrant as specified in its charter)

 

400 Wood Road, Braintree, MA 02184

(Address of principal executive offices)

Registrant’s telephone number, including area code:         (781) 848-7100

Indicate by check mark whether the registrant (1.) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) (2.) has been subject to the filing requirements for at least the past 90 days.

Yes   x      No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer   x         Accelerated filer   o         Non-accelerated filer   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes   o      No   x

The number of shares of $.01 par value common stock outstanding as of December 30, 2006:

26,417,744

 

HAEMONETICS CORPORATION

INDEX

		PAGE
PART I.  FINANCIAL INFORMATION
ITEM 1.  Financial Statements
Unaudited Consolidated Statements of Income — Three and Nine Months Ended December 30, 2006 and December 31, 2005		2
Unaudited Consolidated Balance Sheets — December 30, 2006 and April 1, 2006		3
Unaudited Consolidated Statements of Stockholders’ Equity — Nine Months Ended December 30, 2006 and December 31, 2005		4
Unaudited Consolidated Statements of Cash Flows — Nine Months Ended December 30, 2006 and December 31, 2005		5
Notes to Unaudited Consolidated Financial Statements		6
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk		37
ITEM 4.  Controls and Procedures		38
PART II.  OTHER INFORMATION		38
ITEM 6.  Exhibits		39
Signatures		40

 

1

 

ITEM 1.                    FINANCIAL STATEMENTS

HAEMONETICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Unaudited in thousands, except per share data)

		Three months						Nine Months
		Ended						Ended
		December 30,			December 31,			December 30,			December 31,
		2006			2005(1)			2006			2005(1)
Net revenues		$	113,527		$	105,677		$	332,688		$	309,338
Cost of goods sold		57,108			50,008			163,735			147,380
Gross profit		56,419			55,669			168,953			161,958
Operating expenses:
Research and development		5,804			9,463			17,345			21,287
Selling, general and administrative		33,610			31,250			105,258			91,841
Other unusual charges relating to acquisition (Note 16)		—			165			225			527
In process research and development (Note 16)		—			—			9,073			—
Arbitration award income		—			(26,350		)	—			(26,350		)
Total operating expenses		39,414			14,528			131,901			87,305
Operating income		17,005			41,141			37,052			74,653
Interest expense		(342		)	(435		)	(1,187		)	(1,498		)
Interest income		1,925			2,875			5,902			5,271
Other income, net		816			742			2,153			2,087
Income before provision for income taxes		19,404			44,323			43,920			80,513
Provision for income taxes		2,503			16,399			14,595			29,122
Net income		$	16,902		$	27,924		$	29,324		$	51,391
Basic income per common share
Net income		$	0.64		$	1.05		$	1.09		$	1.95
Income per common share assuming dilution
Net income		$	0.62		$	1.01		$	1.06		$	1.87
Weighted average shares outstanding
Basic		26,527			26,542			26,838			26,406
Diluted		27,367			27,646			27,754			27,413

(1)             Reflects the adjustment to convert our investment in Arryx, Inc. to the equity method for periods prior to the acquisition. See Note #16

The accompanying notes are an integral part of these consolidated financial statements

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HAEMONETICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited in thousands)

		December 30,			April 1,
		2006			2006(1)
ASSETS
Current assets:
Cash and cash equivalents		$	227,707		$	250,667
Accounts receivable, less allowance of $1,459 at December 30, 2006 and $1,086 at April 1, 2006		85,988			86,901
Inventories		59,680			54,571
Deferred tax asset, net		12,987			11,156
Prepaid expenses and other current assets		12,151			15,109
Total current assets		398,513			418,404
Total Property, plant and equipment		301,723			283,475
Less accumulated depreciation		(217,673		)	(208,209		)
Net property, plant and equipment		84,050			75,266
Other assets:
Other Intangibles, less amortization of $16,460 at December 30, 2006 and $14,447 at April 1, 2006		25,927			22,945
Goodwill, net		33,548			18,483
Deferred tax asset, long term		3,759			1,237
Other long-term assets		4,071			9,122
Total other assets		67,305			51,787
Total assets		$	549,868		$	545,457
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt		$	23,248		$	26,176
Accounts payable		16,514			14,217
Accrued payroll and related costs		16,263			18,318
Accrued income taxes		9,473			10,264
Other accrued liabilities		20,451			19,141
Total current liabilities		85,949			88,116
Long-term debt, net of current maturities		6,828			12,977
Other long-term liabilities		3,747			3,800
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $.01 par value; Authorized 150,000,000 shares; Issued 26,417,744 at December 30, 2006 and 26,829,249 at April 1, 2006,		264			268
Additional paid-in capital		157,700			141,371
Retained earnings		295,982			301,759
Accumulated other comprehensive loss		(602		)	(2,834		)
Total stockholders’ equity		453,344			440,564
Total liabilities and stockholders’ equity		$	549,868		$	545,457

(1)             Reflects the adjustment to convert our investment in Arryx, Inc. to the equity method for periods prior to the acquisition. See Note #16

The accompanying notes are an integral part of these consolidated financial statements.

3

 

HAEMONETICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited in thousands)

													Accumulated
							Additional						Other		Total
		Common Stock					Paid-in			Retained			Comprehensive		Stockholders’			Comprehensive
		Shares		Amounts			Capital			Earnings			Loss		Equity			Income
Balance, April 1, 2006 (1)		26,829		$	268		$	141,371		$	301,759		($2,834	)	$	440,564
Employee stock purchase plan		48					1,929								1,929
Exercise of stock options and related tax benefit		393		4			11,883								11,887
Shares Repurchased		(853	)	(8		)	(4,891		)	(35,101		)			(40,000		)
Stock Compensation Expense							7,408								7,408
Net income										29,324					29,324			$	29,324
Foreign currency translation adjustment													5,129		5,129			$	5,129
Unrealized loss on cash flow hedges													(2,897	)	(2,897		)	($2,897		)
Comprehensive income																		$	31,556
Balance, December 30, 2006		26,417		$	264		$	157,700		$	295,982		($602	)	$	453,344

(1)             Reflects the adjustment to convert our investment in Arryx, Inc. to the equity method for periods prior to the acquisition. See Note #16

The accompanying notes are an integral part of these consolidated financial statements.

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HAEMONETICS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited in thousands)

		Nine Months Ended
		December 30,			(1)December 31,
		2006			2005
Cash Flows from Operating Activities:
Net income		$	29,324		$	51,391
In-process research and development and other		$	9,298		$	527
Adjustments to reconcile net income to net cash provided by operating activities:
Non cash items:
Depreciation and amortization		21,026			18,485
Impairment of intangibles		—			3,750
Stock Compensation Expense		7,420			—
Deferred tax expense		—			26
Gain on sales of plant, property and equipment		(818		)	(1,762		)
Tax benefit related to exercise of stock options		—			1,876
Unrealized (gain) loss from hedging activities		(3,336		)	2,160
Change in operating assets and liabilities:
Decrease/(increase) in accounts receivable, net		4,161			(10,214		)
Increase in inventories		(6,492		)	(7,252		)
(Increase)/decrease in prepaid income taxes		229			(927		)
Increase/(decrease) in other assets and other long-term liabilities		1,384			290
(Decrease)/increase in accounts payable and accrued expenses		(2,729		)	1,143
Net cash provided by operating activities		59,467			59,493
Cash Flows from Investing Activities:
Capital expenditures on property, plant and equipment		(26,985		)	(21,362		)
Proceeds from sale of property, plant and equipment		2,588			3,955
Acquisition of Arryx, Inc.		(23,227		)	—
Acquisition of software development company and milestone payments		—			(1,020		)
Acquisition of license rights		—			(3,000		)
Net cash used in investing activities		(47,624		)	(21,427		)
Cash Flows from Financing Activities:
Payments on long-term real estate mortgage		(435		)	(400		)
Net (decrease)/increase in short-term revolving credit agreements		(2,769		)	990
Payments on long-term credit agreements		(5,713		)	(5,714		)
Employee stock purchase plan		1,937			1,496
Exercise of stock options and related excess tax benefit		10,651			9,610
Stock Repurchase		(40,000		)	—
Grant monies received		—			396
Net cash provided by financing activities		(36,329		)	6,378
Effect of Exchange Rates on Cash and Cash Equivalents		1,526			(908		)
Net Decrease in Cash and Cash Equivalents		(22,960		)	43,536
Cash and Cash Equivalents at Beginning of Period		250,667			185,815
Cash and Cash Equivalents at End of Period		$	227,707		$	229,351
Non-cash Investing and Financing Activities:
Transfers from inventory to fixed assets for placements of Haemonetics equipment		$	2,602		$	1,886
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	1,292		$	1,734
Income taxes paid		$	13,054		$	30,063

(1)             Reflects the adjustment to convert our investment in Arryx, Inc. to the equity method for periods prior to the acquisition. See Note #16

The accompanying notes are an integral part of these consolidated financial statements

5

 

1.   BASIS OF PRESENTATION

Our accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  All significant intercompany transactions have been eliminated.  Certain reclassifications were made to prior year balances to conform with the presentation of the financial statements for the nine months ended December 30, 2006. Additionally, the FY06 amounts have been restated in accordance with “Accounting Principles Board, Opinion No 18, The Equity Method of Accounting for Investments in Common Stock” to reflect our investment in Arryx, Inc. for periods prior to the acquisition. (See note #16 Acquisition) Operating results for the nine month period ended December 30, 2006 are not necessarily indicative of the results that may be expected for the full fiscal year ending March 31, 2007.  For further information, refer to the audited consolidated financial statements and footnotes included in our annual report on Form 10-K for the fiscal year ended April 1, 2006.

Our fiscal year ends on the Saturday closest to the last day of March. Fiscal year 2007 and 2006 include 52 weeks with all four quarters including 13 weeks.

2.   RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” which is an interpretation of FASB Statement 109, “Accounting for Income Taxes”. Interpretation No. 48 requires management to perform a two step evaluation for all tax positions, ensuring that these tax return positions meet the “more-likely than not” recognition threshold and can be measured with sufficient precision to determine the benefit recognized in the financial statements. This interpretation therefore provides management with a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements tax positions that the Company has taken or expects to take on their income tax returns. While additional efforts will be necessary to measure, present, and disclose this information, the Company does not believe that this will have a material impact on our results of operations. This statement is effective for our fiscal year 2008.

In December 2006, the FASB issued Statement No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans”, which is an amendment of FASB Statements 87, 88, 106 and 123R. This statement requires that we:

·                  Recognize in our balance sheet an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status.

·                  Measure our defined benefit postretirement plan’s assets and obligations that determine the funded status as of the end of our fiscal year.

·                  Recognize changes in the funded status of our defined benefit post retirement plan in comprehensive income in the year in which the changes occur.

This statement is effective for this fiscal year end FY07. We do not expect this to have a significant effect as, of the various retirement programs the Company offers to its employees, only two of these in our international locations are defined benefit plans covered by the pronouncement.

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3.   EARNINGS PER SHARE (“EPS”)

The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations, as required by FASB Statement No. 128, “Earnings Per Share.”  Basic EPS is computed by dividing net income by weighted average shares outstanding.  Diluted EPS includes the effect of potentially dilutive common shares.

		For the three months ended
		December 30, 2006			December 31, 2005
		(in thousands, except per share amounts)
Basic EPS
Net income		$	16,902		$	27,924
Weighted average shares		26,527			26,542
Basic earnings per share		$	0.64		$	1.05
Diluted EPS
Net income		$	16,902		$	27,924
Basic weighted average shares		26,527			26,542
Effect of stock options		840			1,104
Diluted weighted average shares		27,367			27,646
Diluted earnings per share		$	0.62		$	1.01

 

		For the nine months ended
		December 30, 2006			December 31, 2005
		(in thousands, except per share amounts)
Basic EPS
Net income		$	29,324		$	51,391
Weighted average shares		26,838			26,406
Basic earnings per share		$	1.09		$	1.95
Diluted EPS
Net income		$	29,324		$	51,391
Basic weighted average shares		26,838			26,406
Effect of stock options		916			1,007
Diluted weighted average shares		27,754			27,413
Diluted earnings per share		$	1.06		$	1.87

 

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4.   STOCK-BASED COMPENSATION

On April 2, 2006, we adopted SFAS No. 123R, “Share-based Payment”, which requires that the cost resulting from all share-based payment transactions be recognized as compensation cost over the vesting period based on the fair value of the instrument on the date of grant.  SFAS No. 123R revises SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), which previously allowed pro forma disclosure of certain share-based compensation expense. Further, SFAS No. 123R supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which previously allowed the intrinsic value method of accounting for stock options.   Previously, we accounted for stock option grants using the intrinsic value method, and accordingly our reported net income did not include recognition of stock-based compensation expense prior to our adoption of SFAS No. 123R on April 2, 2006.

We adopted SFAS No. 123R as of April 2, 2006, using the modified prospective transition method. In accordance with the modified prospective transition method, our condensed consolidated financial statements for the prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. Stock-based compensation expense of $7.4 million was recognized under SFAS No. 123R for the nine months ended December 30, 2006.  The related income tax benefit recognized was $2.1 million. We recognize stock-based compensation on a straight line basis.  As noted above, there was no stock-based compensation expense related to employee stock options recognized in the statement of income during the nine months ended December 31, 2005.

For a more detailed description of our stock-based compensation plans, see Note 11—Capital Stock to the Company’s consolidated financial statements included in our Annual Report on Form 10-K for the year ended April 1, 2006.   Our stock-based compensation plans currently consist of stock options and an employee stock purchase plan.  Options become exercisable in the manner specified by the Compensation Committee of our Board of Directors.  Options granted in the nine months ended December 30, 2006 vest over a four year period of time for employees and immediately for Directors and, expire not more than 7 years from the date of grant.

The following table illustrates the pro forma effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 during the three and nine months ended December 31, 2005.

		Three Months Ended December 31, 2005			Nine Months Ended December 31, 2005
		(in thousands, except per share amounts)			(in thousands, except per share amounts)
Net Income, as reported		$	27,924		51,391
Deduct: Total stock-based compensation expense determined under fair value method, net of tax		(1,522		)	(4,702	)
Pro forma net income		$	26,402		46,689
Basic EPS, as reported		$	1.05		1.95
Basic EPS, pro forma		$	1.00		1.77
Diluted EPS, as reported		$	1.01		1.87
Diluted EPS, pro forma		$	0.96		1.70

 

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SFAS No. 123R requires that cash flows relating to the benefits of tax deductions in excess of compensation cost recognized (in our reported or proforma results) be reported as a financing cash flow, rather than as an operating cash flow, as previously required. This excess tax benefit was $0.1 million and $1.7 million for the three and nine months ended December 30, 2006, respectively.

A summary of information related to stock options is as follows:

		For the nine months ended December 30, 2006
Stock Options		Shares		Weighted Average Exercise Price			Weighted Average Remaining Life (Years)		Aggregate Intrinsic Value (dollars in thousands)
Outstanding at April 1, 2006		3,709,258		$	29.71
Granted		741,151		52.68
Exercised		(153,933	)	22.69
Lapsed (forfeited or cancelled)		(23,001	)	42.09
Outstanding at July 1, 2006		4,273,475		$	33.88
Granted		115,695		46.53
Exercised		(217,753	)	22.40
Lapsed (forfeited or cancelled)		(16,610	)	42.20
Outstanding at September 30, 2006		4,154,807		$	34.80
Granted		21,726		48.00
Exercised		(21,712	)	25.69
Lapsed (forfeited or cancelled)		(17,400	)	45.68
Outstanding at December 30, 2006		4,137,421		$	34.87		5.75		$	48,115
Exercisable at December 30, 2006		2,316,878		$	28.87		5.3		$	37,945
Expected to Vest at December 30, 2006		3,923,838		$	34.30		5.73		$	47,426

 

The total intrinsic value of options exercised during the three and nine months ending December 30, 2006 was $0.4 million and $8.7 million, respectively.

As of December 30, 2006, there was $19.6 million of total unrecognized compensation cost related to non vested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 1.5 years. The total fair value of shares fully vested during the nine months ended December 30, 2006 was $24.8 million.

The weighted average fair value for our options granted in the first nine months of 2006 and 2005 was $19.09 and $14.77, respectively. The fair value was estimated using the Black-Scholes option-pricing model based on the weighted average of the high and low stock prices at the grant date and the weighted average assumptions specific to the underlying options. Expected volatility assumptions are based on the historical volatility of our common stock. The risk-free interest rate was selected based upon yields of US Treasury issues with a term equal to the expected life of the option being valued.   The expected life of the option was estimated with reference to historical exercise patterns, the contractual term of the option and the vesting period.  The assumptions utilized for option grants during the periods presented are as follows:

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		December 30,		December 31,
		2006		2005
Stock Options Black-Scholes assumptions (weighted average):
Volatility		0.31		0.31
Expected life (years)		5.0		5.1
Risk-free interest rate		4.98	%	4.08	%
Dividend yield		0.00	%	0.00	%

 

5.   ACCOUNTING FOR SHIPPING AND HANDLING COSTS

Shipping and handling costs are included in costs of goods sold with the exception of $1.8 million and $1.3 million for the three month periods ended December 30, 2006 and December 31, 2005, respectively, and $5.1  million and $4.0 million for the nine month periods ended December 30, 2006 and December 31, 2005, respectively, that are included in selling, general and administrative expenses.  Freight is classified in costs of goods sold when the customer is charged for freight and in selling, general and administration when the customer is not explicitly charged for freight.

6.   FOREIGN CURRENCY

We enter into forward exchange contracts to hedge the anticipated cash flows from forecasted foreign currency denominated revenues, principally Japanese Yen and Euro.  The purpose of our hedging strategy is to lock in foreign exchange rates for twelve months to minimize, for this period of time, the unforeseen impact on our results of operations of fluctuations in foreign exchange rates.  We also enter into forward contracts that settle within 35 days to hedge certain inter-company receivables denominated in foreign currencies.  These derivative financial instruments are not used for trading purposes.  The cash flows related to the gains and losses on these foreign currency hedges are classified in the consolidated statements of cash flows as part of cash flows from operating activities.

7.   PRODUCT WARRANTIES

We provide a warranty on parts and labor for one year after the sale and installation of each device. We also warrant our disposable products through their use or expiration.  We estimate our potential warranty expense based on our historical warranty experience, and we periodically assess the adequacy of our warranty accrual and make adjustments as necessary.

		For the three months ended
		December 30, 2006			December 31, 2005
		(in thousands)
Warranty accrual as of the beginning of the period		$	676		$	698
Warranty provision		399			457
Warranty spending		(396		)	(407		)
Warranty accrual as of the end of the period		$	679		$	748

 

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		For the nine months ended
		December 30, 2006			December 31, 2005
		(in thousands)
Warranty accrual as of the beginning of the period		$	676		$	703
Warranty provision		1,143			1,196
Warranty spending		(1,140		)	(1,151		)
Warranty accrual as of the end of the period		$	679		$	748

8.   COMPREHENSIVE INCOME

Comprehensive income is the total of net income and all other non-owner changes in stockholders’ equity.  For us, all other non-owner changes are primarily foreign currency translation, the change in our net minimum pension liability and the changes in fair value of the effective portion of our outstanding cash flow hedge contracts.

A summary of the components of other comprehensive income is as follows:

		For the three months ended
		December 30, 2006			December 31, 2005
		(in thousands)
Net income		$	16,902		$	27,924
Other comprehensive income:
Foreign currency translation		1,568			(1,274		)
Unrealized (loss) gain on cash flow hedges, net of tax		(582		)	2,064
Reclassifications into earnings of cash flow hedge losses (gains), net of tax		488			(1,215		)
Total comprehensive income		$	18,376		$	27,499

 

		For the nine months ended
		December 30, 2006			December 31, 2005
		(in thousands)
Net income		$	29,324		$	51,391
Other comprehensive income:
Foreign currency translation		5,129			(6,168		)
Unrealized (loss) gain on cash flow hedges, net of tax		(2,485		)	5,819
Reclassifications into earnings of cash flow hedge gains, net of tax		(412		)	(661		)
Minimum pension liabilities adjustment, net of tax		—			(52		)
Total comprehensive income		$	31,556		$	50,329

 

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9.   INVENTORIES

Inventories are stated at the lower of cost or market and include the cost of material, labor and manufacturing overhead.  Cost is determined on the first-in, first-out method.

Inventories consist of the following:

10.    GOODWILL AND OTHER INTANGIBLE ASSETS

Other technology

During the third quarter of fiscal year 2006 we recognized an impairment charge in research and development expenses of $3.8 million related to the excess of the carrying value over the fair market value of an intangible asset, related to platelet pathogen reduction technology.  Fair market value was determined based on discounted cash flows analysis.  The impairment was triggered by near term plans at that time by most of the European market to adopt an alternate technology, bacterial detection.  These intentions were confirmed by published plans and studies issued in our third quarter.  The carrying value of the pathogen reduction technology was reduced to zero.

Customer contracts and related relationships

With the final outcome of our arbitration against Baxter International during the third quarter of fiscal 2006, we retired an intangible customer relationship asset that was satisfied in full as a result of the arbitration award.  Total cost of this retired asset was $2.9 million and accumulated amortization was $0.9 million, for a net carrying value of $2.0 million prior to retirement.

Goodwill

The change in the carrying amount of our goodwill during the nine months ended December 30, 2006 is as follows (in thousands):

(a)             See Note #16 Acquisition for a full description of the acquisition of Arryx, Inc. which occurred on July 18, 2006.

12

Other Intangible Assets

As of December 30, 2006 (in thousands)		Gross Carrying Amount			Accumulated Amortization			Weighted Average Useful life (in years)
Amortized Intangibles
Patents		$	13,682		$	4,376		13
Other technology		19,046			8,574			14
Customer contracts and related relationships		9,155			3,510			14
Subtotal		$	41,883		$	16,460		14
Indefinite Life Intangibles
Trade name		504						Indefinite
Total Intangibles		$	42,387		$	16,460

 

As of April 1, 2006 (in thousands)		Gross Carrying Amount			Accumulated Amortization			Weighted Average Useful life (in years)
Amortized Intangibles
Patents		$	10,389		$	3,198		13
Other technology		17,369			8,349			14
Customer contracts and related relationships		9,130			2,900			14
Subtotal		$	36,888		$	14,447		14
Indefinite Life Intangibles
Trade name		503						Indefinite
Total Intangibles		$	37,391		$	14,447

 

Changes to the net carrying value of our intangible assets from April 1, 2006 to December 30, 2006, reflect the acquisition of Arryx, Inc. (see Note 16), amortization expense and the effect of exchange rate changes in the translation of our intangible assets held by our international subsidiaries.

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Amortization expense for amortized other intangible assets, excluding impairment charges, was $0.7  million and $0.6 million for the three months ended December 30, 2006 and December 31, 2005, respectively. Amortization expense for the nine months ended December 30, 2006 and December 31, 2005 was $2.0 million and $1.6 million, respectively, excluding the impact of the impairment charges. Annual amortization expense is expected to approximate $2.6 million for fiscal years 2007 and 2008, $3.1 million for fiscal year 2009, and $3.7 million for both fiscal years 2010 and 2011.

11.    INCOME TAXES

Our reported tax rate includes two principal components: an expected annual tax rate and discrete items that are recorded in the quarter that an event arises.  Events or items that give rise to discrete recognition include finalizing audit examinations for open tax years or a stock acquisition.

The reported tax rate was 12.9% and 33.2% for the current three and nine month periods ended December 30, 2006 respectively.  The reported tax rate includes:

A 35.0% expected annual tax rate which reflects higher tax exempt income than in prior periods and stock compensation expenses  that are not deductible in all jurisdictions.

The reported rate also incorporates:

The $9.1 million non-deductible In Process Research and Development charge (see Footnote #16 Acquisition) and the adjustment to convert our investment in Arryx, Inc. to the equity method.

A $3.6 million reversal in previously accrued income taxes upon completion of an Internal Revenue Service income tax return examination for fiscal years 2001 through 2003.

A $.4 million net revision in the estimated income tax expense for fiscal year 2006 and certain international tax matters.

The reported tax rate was 33.7% and 35.2% for the three and nine months ended December 31, 2005, respectively.

We expect our annual tax rate to be approximately 35.0% for the remainder of fiscal year 2007.  Future adjustments may also increase or decrease the reported tax rate.

Legislation was recently enacted to retroactively reinstate the Federal Research and Experimentation tax credit that provides a tax benefit on certain incremental R&D expenditures to the beginning of the fiscal year Accordingly, the benefit for nine months ended December 30, 2006 is reflected in our expected annual tax rate this quarter.

12.   COMMITMENTS AND CONTINGENCIES

We are presently engaged in various legal actions, and although ultimate liability cannot be determined at the present time, we believe, based on consultation with counsel, that any such liability will not materially affect our consolidated financial position or our results of operations.

On January 21, 2004 we filed a claim for binding arbitration against Baxter International, Inc. (“Baxter”), seeking an arbitration award to compel Baxter to honor its obligations to Haemonetics in the contracts it assumed, or to

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pay us damages. Provisions in our supply contracts signed with Alpha Therapeutics Corporation (“Alpha”) include protections in case of a change in ownership. In particular the contracts required that if Alpha were sold, the buyer must assume the obligations of the contracts.

On October 6, 2005 the arbitration panel entered a final award in our claim against Baxter.  On October 13, 2005 we received $30.8 million from Baxter in full satisfaction of this award including damages, reimbursement of attorneys’ fees and costs, and statutory interest since the time of the arbitration panel’s initial award on May 20, 2005.

Certain of the award proceeds relate to the repayment of a lease receivable, with a carrying amount of $0.7 million, and the retirement of an intangible asset, with a carrying amount of $2.0 million, related to a supply contract that has been fully satisfied with this award.  After retirement of these assets the award increased pre-tax income by $28.1 million in the three months ended December 31, 2005, including a reduction in selling, general and administration expenses of $0.4 million for attorneys’ fees incurred during the current year, $26.4 million of arbitration award income (representing the operating income component of the damages), and $1.3 million of interest income, representing the receipt of statutory interest on the arbitration award since the time of the arbitration panel’s initial award on May 20, 2005 through the receipt of the award proceeds on October 13, 2005.

13.   DEFINED BENEFIT PENSION PLANS

Two of the Company’s foreign subsidiaries have defined benefit pension plans covering substantially all full time employees at those subsidiaries.  Net periodic benefit costs for the plans in the aggregate include the following components:

		For the three months ended
		December 30, 2006			December 31 2005
		(in thousands):
Service Cost		$	155		$	180
Interest cost on benefit obligation		46			45
Expected return on plan assets		(20		)	(16		)
Amortization of unrecognized prior service cost, unrecognized gain and unrecognized initial obligation		1			6
Net periodic benefit cost		$	182		$	215

 

		For the nine  months ended
		December 30, 2006			December 31 2005
		(in thousands):
Service Cost		$	479		$	561
Interest cost on benefit obligation		142			136
Expected return on plan assets		(61		)	(49		)
Amortization of unrecognized prior service cost, unrecognized gain and unrecognized initial obligation		4			19
Net periodic benefit cost		$	564		$	667

 

14.   SEGMENT INFORMATION

Segment Definition Criteria

We manage our business on the basis of one operating segment: the design, manufacture and marketing of automated blood processing systems.  Our chief operating decision-maker uses consolidated results to make

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operating and strategic decisions.  Manufacturing processes, as well as the regulatory environment in which we operate, are largely the same for all product lines.

Product and Service Segmentation

We have two families of products: (1) those that serve the blood donor and (2) those that serve the patient.  Under the donor family of products we have included blood bank, red cell and plasma collection products. The patient products include autologous blood salvage products targeting surgical patients who lose blood while in the operating room and while in recovery.

Donor

The blood bank products include machines, single use disposables and solutions that perform “apheresis,” (the separation of whole blood into its components and subsequent collection of certain components, including platelets and plasma) as well as the washing of red blood cells for certain procedures. The main devices used for these blood component therapies are the MCS®+ mobile collection systems and the ACP® 215 automated cell processing system. In addition, the blood bank product line includes generic solutions that we produce for pharmaceutical companies pursuant to contracts.

Red cell products include machines, single use disposables and solutions that perform apheresis for the collection of red blood cells.  The devices used for the collection red blood cells is the MCS®+ 8150 mobile collection system.

Plasma collection products are machines, disposables and solutions that perform apheresis for the separation of whole blood components and subsequent collection of plasma.  The devices used in automated plasma collection are the PCS®2 plasma collection system and the Superlite™.

In 2003, Haemonetics entered into a marketing partnership with Hemosystems S.A. to market Hemosystems’ ScanSystem platelet bacterial detection system.  Over the past three years, Haemonetics and Hemosystems have made progress in penetrating this market, but at a slower rate than hoped.  Haemonetics decided during fiscal 2007 not to renew its partnership with Hemosystems so that it can devote its sales resources to other projects.

Patient

Patient products include machines and single use disposables that perform surgical blood salvage in orthopedic and cardiovascular surgical applications. Patient products include the OrthoPAT®, Cell Saver® and cardioPAT autologous blood recovery systems, and the Smart Suction Harmony which is a suction device designed to operate together with these blood recovery systems. Cell Saver and cardioPAT technologies are used  cardiovascular,  for higher blood loss surgeries and trauma.   OrthoPAT technology is used for lower, slower blood loss orthopedic procedures, where bleeding takes place during and after surgery.  These technologies perform a procedure whereby shed blood is collected, cleansed and made available to be transfused back to the patient.

Other

Other revenue includes revenue generated from equipment repairs performed under preventive maintenance contracts or emergency service billings and miscellaneous sales, including revenue from our information services division, 5D. 5D provides software support and collection and data management systems, principally to plasma collectors and the US Department of Defense.

Revenues from External Customers:

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		Three months Ended
		December 30, 2006			December 31, 2005
		(in thousands)
Disposable Revenues by Product Family
Donor:
Plasma		$	32,362		$	27,461
Blood Bank		30,954			33,588
Red Cell		11,132			9,304
		$	74,448		$	70,353
Patient:
Surgical		$	16,989		$	16,791
OrthoPAT		7,491			5,697
		$	24,480		$	22,488
Disposables Revenue		$	98,928		$	92,841
Equipment		5,194			5,813
Other		9,405			7,023
Total revenues from external customers		$	113,527		$	105,677

 

		Nine months Ended
		December 30, 2006			December 31, 2005
		(in thousands)
Disposable Revenues by Product Family
Donor:
Plasma		$	96,253		$	80,702
Blood Bank		93,998			98,471
Red Cell		32,105			26,662
		$	222,356		$	205,835
Patient:
Surgical		$	49,298		$	49,281
OrthoPAT		22,132			15,822
		$	71,430		$	65,103
Disposables Revenue		$	293,786		$	270,938
Equipment		15,207			18,547
Other		23,695			19,853
Total revenues from external customers		$	332,688		$	309,338

 

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15.   RESTRUCTURING

During the nine months ended December 30, 2006, we began the reorganization of certain of our international sales and service organizations and recorded pre-tax restructuring costs of $2.9 million as selling, general and administrative costs.  The aggregate full year restructuring costs related to these actions are expected to be in the range of $2.5 million to $4 million on a pre-tax basis.  We expect to incur approximately $3.0 million of employee related costs, including severance and certain other employee benefits, and up to approximately $1.0 million of lease termination and related facility closure costs.

The following summarizes the restructuring activity for the nine months ended December 30, 2006

(Dollars in thousands)		Cost Incurred			Payments			Asset Write down			Balance at December 30, 2006
Employee-related costs		$	2,370		$	2,138		$	—		$	232
Facility related costs		562			—			101			461
		$	2,932		$	2,138		$	101		$	693

 

16.   ACQUISITION

On July 18, 2006, the Company acquired the remaining outstanding shares of Arryx, Inc. for $26 million.  We previously had a $5 million cost method investment in Arryx, Inc. as well as a license agreement for the use of its technology in a defined field of use with a carrying value of approximately $3 million. The results of Arryx, Inc. have been included in our consolidated financial statements for periods after the acquisition date, and we have restated our prior period financial results to record our cost method investment on the equity method of accounting in accordance with Accounting Principles Board, Opinion No 18, “The Equity Method of Accounting for Investments in Common Stock” which resulted in recognizing our 18.6% proportionate share of Arryx losses in periods prior to the current acquisition. We recorded cumulative equity method losses of $1.3 million for periods prior to the acquisition date. We recorded an in-process research and development charge of $9.1 million in connection with this acquisition.

Purchase Price

The Company has accounted for the acquisition of Arryx, Inc. as the purchase of a business under U.S. Generally Accepted Accounting Principles. Under the purchase method of accounting, the assets and liabilities of Arryx, Inc. were recorded as of the acquisition date, at their respective fair values, and consolidated with those of Haemonetics. The purchase price is based upon estimates of the fair value of assets acquired and liabilities assumed. The purchase price allocation will be finalized no later than one year from the acquisition date. The preparation of the valuation required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including product and license revenues, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.

The preliminary purchase price is as follows

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(in thousands)
Consideration for Arryx, Inc.
Cash portion of consideration		$	26,558
License agreement with Arryx, Inc.		3,298
Cost Method Investment, representing 18.6% of outstanding Arryx, Inc. Shares		5,000
Adjust Cost Method Investment to Equity Method in accordance with Accounting Principles Board Opinion No. 18		(1,311		)
Total Consideration		33,545
Other acquisition-related costs
Other estimated acquisition-related costs		447
Total acquisition related costs		$	33,992

 

We applied the guidance under EITF 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination”, to determine if any gain or loss was inherent in our existing license agreement with Arryx, Inc.  We determined that no loss was inherent in this existing contractual relationship with Arryx, Inc., and accordingly included it at its net book value at the acquisition date in the purchase price determination.

Purchase Price Allocation

The following chart summarizes the preliminary purchase price allocation

(in thousands)
Cash		$	3,900
Intangible assets subject to amortization		6,028
Goodwill		14,926
Other assets		565
Deferred Tax Asset, Long Term		2,696
In-process research and development		9,073
Current liabilities		(785		)
Deferred tax liabilities		(2,411		)
Total		$	33,992

 

The deferred tax liability primarily relates to the tax impact of future amortization associated with the identified intangible assets acquired, which are not deductible for tax purposes.

The excess of the purchase price over the fair value of net tangible assets acquired was allocated to specific intangible asset categories as follows:

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(in thousands)		Amount Assigned			Weighted Average Amortization Period		Risk-Adjusted Discount Rate used in Purchase Price Allocation
Amortizable intangible assets
Technology — developed		$	2,735		10.0 years		26	%
Patents		3,293			12.0 years		25	%
		$	6,028		10.5 years
Goodwill		$	14,926
In-process research and development		$	9,073				29	%

 

The Company believes that the estimated intangible assets represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the assets. The Company used the income approach to determine the fair value of the amortizable intangible assets and purchased research and development.

Various factors contributed to the establishment of goodwill, including: the value of Arryx, Inc.’s highly trained work force as of the acquisition date, the expected business plans and associated revenue from future products and license opportunities.  The goodwill acquired is not deductible for tax purposes.

The developed technology acquired represents the value associated with currently marketed product, the BioRx device.  This device employs holographic optical trapping (“HOT”) technology, and is currently used by large research and educational institutions. The Company used the income approach to estimate the fair value of the developed technology as of the acquisition date. The Company determined that the estimated useful life of the developed technology is 10 years.

The estimated fair value of the patents was determined by using the income approach.  The estimated revenues and associated cash flows attributable to the patent portfolio were discounted.  The estimated useful life of the patent asset is estimated to be 12 years.

In-process Research and Development

The $9.1 million purchased research and development that was charged to operating expenses consists of a project for the advancement and development of the technology in the blood collection and processing applications and for the purposes of licensing the technology outside of the blood collection and processing marketplace.  The project includes work to reduce the size of the technology, including reducing the size of the laser, and developing mechanisms to label samples and collections.

For purposes of valuing the acquired purchased research and development, the Company estimated total costs to complete the current development of the platform of approximately $11 million. We estimate this project will be complete at the end of fiscal year 2008. For the in-process project the Company acquired in connection with the acquisition of Arryx, Inc., it used a risk-adjusted discount rate of 29% to discount the projected cash flows. The Company believes that the estimated purchased research and development amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the projects.

The major risks and uncertainties associated with the timely and successful completion of the in-process research and development project include the ability to both complete the development of the platform and to establish its effectiveness for different applications for the purposes of licensing the technology outside of the blood collection and processing marketplace.

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17.   CAPITALIZATION OF SOFTWARE DEVELOPED FOR INTERNAL USE

The Company is implementing an Enterprise Resource Planning (ERP) system. We plan to implement the system in three phases over the next three years

The cost of software that is developed for internal use is accounted for pursuant to AICPA Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). Pursuant to SOP 98-1, the Company capitalizes costs incurred during the application development stage of software developed for internal use, and expenses costs incurred during the preliminary project and the post-implementation operation stages of development. During the first nine months of 2006, the Company capitalized $4.3 million in costs incurred for acquisition of the software license and related software development costs for new internal software development that was in the application stage. The total capitalized costs incurred to date include $1.8 million for the cost of the software license and $2.5 million in internal personnel and third party development costs.

18.   SUBSEQUENT EVENT

On January 29, 2007 Haemonetics Corporation (the “Company”) received $6 million in full satisfaction of its claims against Baxter Healthcare Corporation, Baxter International Inc. and Baxter Healthcare SA (together “Baxter”) related to certain platelet pathogen reduction contracts. In connection with the settlement of these claims, the Technology Development Agreement and Requirements Contract between the Company and Baxter are terminated, and Haemonetics no longer retains any rights to distribute the INTERSOL product (note INTERSOL is a registered trademark of Baxter). Haemonetics will record the receipt of this settlement in the fourth quarter ending March 31, 2007. The settlement will have a favorable impact of $.12 on our fourth quarter earnings per share.

On January 30, 2007, Haemonetics Corporation (the “Company”) acquired the assets of Information Data Management, Inc. (“IDM”) for approximately $9 million in cash.  IDM is a business that develops software for blood collection agencies.  The purchase price will be principally allocated to intangible assets including customer contractual relationships, completed technology and goodwill.  The results of the IDM operations will be included in our consolidated results for periods after the acquisition date.

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